Why China is Getting Their Feet Wet in the Oil Sands

In last week’s Energy Trends Insider our featured stories were Why China is Dipping Their Feet in the Canadian Oil Sands, CNOOC’s Purchase of Nexen May Signal New Wave of Consolidation, and Subscriber Questions on Lanzatech and Butanol. As we have done previously, we would like to share one of those stories with regular readers of this column. Interested readers can find more information on the newsletter and subscribe at Energy Trends Insider.

Why China is Getting their Feet Wet in the Oil Sands

Over the past two decades, Chinese oil consumption has quadrupled to nearly 10 million barrels per day. For the past decade they have been on a growth trajectory which has shown signs of slowing, but could nevertheless see them overtake the U.S. as the world’s top oil consumer by the end of the decade. As I have written before, I believe China’s economy will be the single-biggest long-term driver of oil prices over at least the next 5-10 years.

As a result, China’s presence has been felt across the globe as they aggressively make acquisitions to feed their thirst for oil. Over the past decade, Chinese spending on energy acquisitions has risen by more than an order of magnitude, rising to nearly $48 billion in 2009 and 2010.

China has long held ambitions with respect to North American resources. In 2005, CNOOC made a takeover bid for U.S.-based Unocal, which was the 9th largest U.S.-energy company. This news alarmed U.S. politicians who injected themselves into the discussions on the basis of national security implications. CNOOC had underestimated the political opposition, and ultimately withdrew their bid. Unocal was taken over by Chevron at a slightly lower price than that offered by CNOOC.

Having learned some valuable lessons from their Unocal experience, this past week CNOOC made a $15 billion bid to take over Canada’s Nexen. The deal would reportedly be the largest acquisition by a Chinese company, and would give China a solid foothold in North America and a more active presence in Canada’s oil sands. (China has already made investments totaling nearly $3 billion in Canada).

News of this deal has once again alarmed U.S. politicians. Democrat Senator Chuck Schumer has drafted a letter to Treasury Secretary Timothy Geithner in which he argues that the U.S. government should block the deal until China provides fair access for U.S. companies to invest in China. On the face of it that seems laughable; what jurisdiction does the U.S. have over the deal? Probably not a lot, although Nexen does own a U.S. subsidiary with offshore oil assets in the Gulf of Mexico. Congressman Markey also waded into the discussion, sending a letter to Geithner asking that any leases given to CNOOC not receive preferential treatment on royalties.

In my opinion, the deal will ultimately be approved. China has spent time fostering good relations with Canada, and Canada does not want to have the destiny of their oil industry tied primarily to U.S. political whims. I think China’s ultimate objective is to develop a strong presence in Canada’s oil sands, and get a pipeline built to the West Coast. You can bet that they are hoping that the Keystone XL pipeline expansion is not ultimately approved, as failure to expand this pipeline enhances China’s chances of becoming the destination of choice for that oil.

How many pipelines will the oil sands need in the future? If projections for 2021 of 3.7 million bpd are correct, that’s an awful lot of oil to go around. The combined Keystone pipelines, if the XL portion is built, will take about 1.1 million bpd. Of course, a part of that will include Bakken oil. There are a couple pipelines that lead west that are being planned, but they are facing opposition. A few days ago, the Premier of Alberta threw a plan out to move oil east through Manitoba, Ontario, and Quebec to refineries in eastern Canada.

This recent slide show of professional aerial images was shocking. Like the article’s author, I too thought that I’d learned something about destructive tar sands. However, I didn’t accurately interpret its immensity, intensity, nor its continuation for another 25 years before ‘reclamation time,’ initiates and begins by moving some of the piles of dirt back into the huge drainage pit oily lakes, etc.

A woman attorney quoted that this Tar Sands BITUMEN EXTRACTION process is illegal and that a international law should be introduced to stop it… She and others are making big statements indeed in the face of Canadian Gov’t approvals with spokespersons talking about $1-2 trillion of economic impact over the next 25 years and employing a bit over 600,000 stooges as the rationale to proceed. Those that dug that mountainside open-pit copper mine at Butte, Montana, needed laborers too.